Expected Value Worksheet 2y1p3i

WHITE CELLS ARE ADJUSTABLE © Kristoffer Burnett - Certified Management ant, 2009-2011

Expected Value Worksheet Input

Investment amount Scenario Cut OH costs by 50% Cut OH costs by 30% Cut OH costs by 10% Keep OH costs the same Increase OH costs by 10% Total expected value

Decision A Purchase 2 new pieces of machinery $ 400,000 1 Probability Dollar Impact Expected Value 17.5% $ 1,450,000 $ 183,750 22.5% 870,000 105,750 35.0% 290,000 (38,500) 15.0% (60,000) 10.0% (290,000) (69,000) $ 122,000

Decision B Purchase 1 new piece of machinery $ 250,000

$

Decision C Purchase no new machinery

Probability Dollar Impact Expected Value 15.0% $ 1,450,000 $ 180,000 20.0% 870,000 124,000 30.0% 290,000 12,000 20.0% (50,000) 15.0% (290,000) (81,000) $ 185,000

Probability Dollar Impact Expected Value 0.0% $ 1,450,000 $ The scenario, probability, and dollar impact are all variable and unique to each decision. They may vary wildly or not at all 0.0% 870,000 0.0% 290,000 100.0% 0.0% (290,000) $ -

Output Outcome desired

Maximize expected value

Optimum decision

Purchase 1 new piece of machinery

Expected value

$200,000

$ 185,000

Expected Values

$180,000

$160,000

$140,000

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

$0

Notes: 1 The expected value equals (the payoff - the investment amount) * the probability.

These are the options facing the organization, of which only one can be selected

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Total expected value